PAX Global Technology's (HKG:327) Earnings Are Growing But Is There More To The Story?

By
Simply Wall St
Published
January 11, 2021

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. This article will consider whether PAX Global Technology's (HKG:327) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months PAX Global Technology made a profit of HK$682.5m on revenue of HK$5.10b. One positive is that it has grown both its profit and its revenue, over the last few years.

See our latest analysis for PAX Global Technology

SEHK:327 Earnings and Revenue History January 12th 2021

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. This article will discuss how unusual items have impacted PAX Global Technology's most recent profit results. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

The Impact Of Unusual Items On Profit

For anyone who wants to understand PAX Global Technology's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by HK$110m due to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect PAX Global Technology to produce a higher profit next year, all else being equal.

Our Take On PAX Global Technology's Profit Performance

Unusual items (expenses) detracted from PAX Global Technology's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that PAX Global Technology's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 25% per year over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing PAX Global Technology at this point in time. While conducting our analysis, we found that PAX Global Technology has 1 warning sign and it would be unwise to ignore it.

This note has only looked at a single factor that sheds light on the nature of PAX Global Technology's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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